A reverse mortgage pitch that could ruin you
Seniors who've gotten reverse mortgages report aggressive sales tactics reminiscent of the subprime mortgage heyday.
This post comes from Marilyn Lewis of MSN Money.
Several publications are reporting that aggressive new sales techniques for reverse mortgages are causing seniors to lose their homes.
"The very loans that are supposed to help seniors stay in their homes are in many cases pushing them out," The New York Times writes.
New set of troubles
Reverse mortgages have been growing riskier recently.
Not that they haven't caused problems before. "Until recently, they were the Wild West of retirement planning. High upfront costs, poor disclosure and dodgy sales pitches made them an option that many advisers avoided," The Wall Street Journal says in a two-part review of the pros, cons and pitfalls. (See Part One and Part Two, on pitfalls.)
The introduction, in 2010, of reverse mortgages backed by the Federal Housing Administration offered a safer option. But the financial crisis, baby boomers' high levels of debt, and a growing complexity in the reverse mortgage industry have introduced a new set of troubles.
This summer, the Consumer Financial Protection Bureau reported to Congress (.pdf file) on two newly popular and dangerous trends. (The Los Angeles Times recaps them succinctly.)
- People increasingly are taking out reverse mortgages too young -- in their 60s -- which leaves them without a cushion for their later years.
- Borrowers frequently take the money as an (expensive) lump sum rather than a more cost-effective line of credit.
The New York Times and others are writing about aggressive, and in some cases blatantly false, sales pitches. The Times reports:
"Some lenders are aggressively pitching loans to seniors who cannot afford the fees associated with them, not to mention the property taxes and maintenance. Others are wooing seniors with promises that the loans are free money that can be used to finance long-coveted cruises, without clearly explaining the risks. Some widows are facing eviction after they say they were pressured to keep their name off the deed without being told that they could be left facing foreclosure after their husbands died."
Peter H. Bell, head of the National Reverse Mortgage Lenders Association, told the Times he is working to establish a uniform standard for assessing if seniors can afford the loans.
Changes in the industry
Behind this aggressive salesmanship is a change in the reverse mortgage industry. Since the housing crash, big players like MetLife, Wells Fargo and Bank of America have withdrawn from the business. A drop in home values and the increased difficulty in judging borrowers' creditworthiness reportedly make reverse mortgages a less attractive business.
About a quarter-million reverse mortgages are outstanding in the U.S. The number of loans made each year is falling, to 51,000 in 2011 from 115,000 at the peak in 2007.
With the departure of the big banks, the industry now is largely in the hands of smaller players, some of whom, the Times says, are responsible for the worst of the current problems. Among those problems are incentives to salespeople that stand to re-create consumer abuses last seen in the subprime mortgage heyday.
"There are many of the same red flags, including explosive growth and the fact that these loans are often peddled aggressively without regard to suitability," Minnesota Attorney General Lori Swanson told the Times. The paper says its account is based on talks with "regulators, housing counselors and elder-care advocates."
Dodgy tactics to watch for
Of the new sales pushes, the Tampa Bay Times says:
"Sellers of reverse mortgages receive bigger fees if the borrower receives payment in a lump sum, but borrowers are more likely to lose their homes this way, unable to keep up with taxes and insurance payments. The (CFPB) found that about 70% of reverse mortgages are taken as a lump sum, up from 3% in 2008."
Also, reverse mortgage brokers reportedly earn more money if the loan application lists only the older spouse's name. But that means that when the older member of the couple dies, the younger spouse -- usually a woman -- cannot remain in the home, as she could if she was part of the transaction.
The New York Times spoke with two widows whose names were not on their husbands' reverse mortgage applications. One lost her home to the lender after she was unable to pay taxes and insurance. The other was told by the reverse mortgage lender that she must pay $293,000 or leave.
"Ms. Forde said she was never informed that if she wasn't on the reverse mortgage deed, she would have virtually no right to stay in her home unless she bought it outright," says the Times.
Among other issues The New York Times points out:
- Solicitations describing reverse mortgages as "free money" or that promise -- incorrectly -- that seniors won't lose their homes.
- Lenders who urge prospective borrowers to take a vacation with the money: "Just because you're retired doesn't mean you don't need a vacation every now and then," said one pitch.
- Unlicensed reverse mortgage companies.
The Times links to one solicitation that doesn't mention it's a pitch for reverse mortgages. Instead, it's framed as an offer to help homeowners capitalize on a government program, the "Housing & Recovery Act of 2011." In fact, there is no such act.
More on MSN Money:
- Retirement number: Is 8 enough?
- How to avoid a depressing retirement
- Smart Spending on the go: Get our app for Android or iPhone
- Mortgage relief after the superstorm
- Did bank delays cause 800,000 foreclosures?
- Foreclosed homeowners shopping again
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